Category: Debt

A rapidly increasing trade war and an escalation-focusing RBI (Reserve Bank of India) is thrusting the local fund and money managers into low-risk and shorter debt securities. Take a look at their plans and what they said about it –

Choose the 3-year segment

Mahendra Jajoo, Head of India Fixed-Income (Mirae Asset Management)

“The most appealing segment is the three-year segment because after that there are a lot of riskiness and challenges to face.”

The most beneficial thing about the three-year segment is that if you are to manage in a situation where you predict that the macros are somewhat risky and uncertain, but probably have ended being worse, what you think you do in that situation? I things started being worse from here, then you are not freaking out much because, at the very end of 3 years, you will get the capital back.

“As there are a plenty of riskiness and uncertainties regarding policy decisions and macros, make your portfolio defensive. By being defensive, I mean purchasing two or three-year sovereign bond i.e. short-duration.”

“Short-end of curve provides the most comfort at this point. The delta risk to take for maturities which are long-term is not equivalent to the available return.”

She said that she suggests state bonds of the same duration rather than AAA and sovereign bonds.

Probably there will be two or three more rate hikes as per recent pricing followed by relatively long pause after that. Additional policy action is on the cards with clarity.

DISCLAIMER

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here.

With the stock market going through volatile times, many fund managers seem to be moving to cash. According to data from Ace Mutual Fund database, more than 20 diversified equity funds currently have a cash allocation of above 10 percent in their portfolios. While it may seem like a safe call, Many fund manager say that it should depend on the fund’s mandate. Many fund houses have in-house rules that forbid their fund managers from going into cash above five-six percent.

To reduce the mid-cap pain

The ongoing correction in mid- and small-cap stockshas forced many fund managers to seek refuge in cash. “Many funds with a mid- and small-cap mandate and even others that had taken large exposure to these stocks during the rally have been hit in a big way. These funds have moved into cash to reduce the pain from the correction.” Funds that have booked timely profits in mid- and small-cap stocks too have been left holding high levels of cash.

Many funds are still adjusting their portfolios to comply with Sebi’s new categorisation norms. If, for instance, large-cap funds had taken high exposure to mid-caps to boost their returns, they are now selling those stocks to turn compliant with the new norms.

Another reason is that political uncertainty is affecting sentiment. “Several state elections are due this year, and then we have the general elections next year. Many fund managers are sitting on cash because of the current volatility in the markets, and to see how things shape up politically. Some funds, such as value funds and dynamic asset allocation funds, allocate to equities based on market valuations. When valuations move high, they move into cash.

Many fund managers are also facing the problem of plenty. While the industry is receiving monthly inflows of Rs 75 billion through systematic investment plans, there aren’t many opportunities due to the high valuations in the midcap and smallcap segments. Even many large-cap stocks seem overvalued.

There are risks too

During the financial crisis of 2008, many fund managers had gone heavily into cash to prevent their funds from correcting deeply. However, when the markets rebounded in 2009, these funds were left on the sidelines. Their performance took a knock, and it took them several quarters to catch up with peers who were fully invested. After this, many fund houses introduced internal rules stipulating that fund managers should not gain more than five percent exposure to cash. When fund managers take high cash allocation calls, it implies that they are trying to time the market, a tricky thing for any fund manager to pull off consistently.”

When funds take large cash calls, it also skews the investor’s asset allocation. A simple example will help illustrate this point. Suppose that an investor wants 50 percent equity and 50 percent fixed income exposure in his portfolio. He invests the 50 percent in an equity fund. But the fund manager invests only 70 percent of his fund portfolio in equities. As a result, the investor’s equity allocation falls to 35 percent. This is a more conservative allocation than he desires and could affect his long-term returns. Asset allocation is best left to investors themselves.

Exceptions to this rule

While most equity funds should stay almost fully invested, dynamic asset allocation funds and value funds are exceptions. Dynamic asset allocation funds, as their name implies, take asset allocation calls, often based on a formula. When markets become expensive, as indicated by price to earnings (P/E) or price to book value (P/BV) ratio, they reduce allocation to equities, and vice-versa.

Value-oriented funds are the other exception. Quantum Long Term Equity Value Fund, for instance, doesn’t shy of parking a considerable portion of its portfolio in cash if the situation warrants. Says Atul Kumar, head-equity funds, Quantum Asset Management: “If we find value in stocks, we stay invested. But many of the stocks that we held reached the sell limit we had set for them, so we were forced to sell them. We are also finding fewer new opportunities. That is why our cash level has gone up. It is not a tactical call. It comes out of our bottom-up, process-driven approach.”

PPFAS Long Term Equity Fund currently has a cash allocation of 23.28 percent. Explaining the fund’s approach, Rajeev Thakkar, chief investment officer and director, PPFAS Mutual Fund says: “We don’t start off with any target cash position. Our objective is to deploy everything in equities. But if we find stocks worth investing in only up to 77 percent of our corpus, then 23 percent will be the residual cash that will lie around till we find suitable opportunities.”

Going into cash can prove advantageous in certain situations. Says Thakkar: “If there is a significant correction, the cash position could become a significant factor responsible for outperformance.” He adds that being in cash also gives the fund manager opportunities to buy stocks at attractive valuations when the markets or select stocks correct.

According to Radhika Gupta, CEO edelweissamc taking large cash calls in long only funds … something to avoid because it distorts the asset allocation of an investor, given they are investing in a relative return fund.

Most individuals can’t think beyond bank deposits when it comes to deploying their savings. However, fixed deposits do not pay much, and the interest is added to the income and taxed as per the Income Tax slab applicable.

This is the main reason why many investors investing in debt mutual funds instead of parking money in bank deposits. Debt mutual funds may offer market linked returns, which could be marginally higher than bank deposits.

If invested with a horizon of more than three years, debt mutual funds may offer better after-tax returns. Investments in debt mutual funds held over three years are taxed at 20 percent with indexation benefit. The indexation helps to bring down the actual taxes to a single-digit in an inflationary scenario.

If you are investing for less than three years, both bank deposit and debt mutual funds are taxed similarly. Returns or interest would be added to the income and taxes as per the income tax slab applicable to the investor.

If you would like to explore debt mutual funds, here is some help.

Point to note:there are several kinds of Debt mutual funds. You should choose a scheme that matches your investment horizon and risk profile.

Liquid Funds are very low-risk funds. They invest in highly liquid money market instruments. They invest in securities with a residual maturity of upto 91 days. Investors can park money in them for a few days to few months. These funds may offer marginally higher returns than bank deposits.

Fixed Maturity Plans (FMPs) are a good alternative to fixed deposits for investors in the higher tax bracket. These are closed-ended debt mutual funds with defined maturity. FMPs usually invest in securities which match their tenure and follow buy and hold till maturity strategy. This makes it free from interest rate risk. An FMP may match the yield offered by its portfolio constituents with minute deviations. FMPs also have credit risk, which means that its returns will be hit ..

Short-Term Funds invest mostly in debt securities with an average maturity of one to three years. These funds perform well when short-term interest rates are high. They are suitable to invest with a horizon of a few years.

Dynamic Bond Fundshave an actively-managed portfolio that varies dynamically with the interest rate view of the fund manager. These funds invest across all classes of debt and money market instruments with varying maturities. They are ideal for investors who want to leave the job of taking a call on interest rates to the fund manager.

Income Funds are highly vulnerable to the changes in interest rates. These funds invest in corporate bonds, government bonds and money market instruments with long maturities. They are suitable for investors who are ready to take high risk and have a long-term investment horizon. The right time to invest in these funds is when the interest rates are likely to fall.

Credit Opportunities Funds are the debt funds which invest in corporate bonds and debentures of credit rating below AAA. The idea is to invest in low-rated securities with strong fundamentals which are expected to see a rating upgrades in the future, benefiting the portfolio and investors. These funds involve high credit risk. A default or a downgrade in a rating of the scheme’s portfolio holdings may hit the returns badly. Their portfolio consists government securities and T-Bills ..

Gilt Funds invest in government securities. They do not have the default risk because the bonds are issued by the government. However, these funds are highly vulnerable to the changes in interest rates and other economic factors. These funds have very high interest rate risk. Only investors with a long-term horizon should consider investing in them.

Debt-oriented Hybrid Fundsinvest mostly in debt and a small part of the corpus in equity. The equity part of the portfolio would provide extra returns, but the exposure also makes them a little riskier than pure debt schemes. Investors with a horizon of three years or more can consider investing in them.

Disclaimer: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

The RBI in its bi-monthly policy review yesterday kept the repo rate unchanged at 6% and continued with the neutral stance.

The investors should stay away from long term bond funds and go for accrual funds and short term funds.

Here is what experts say :

Amit Tripathi, CIO – Fixed Income Investments, Reliance Mutual Fund

The tone in the policy was very balanced. The RBI is more focused on medium term drivers of growth and inflation, and wants to support the nascent recovery. The markets are pricing in many risks that RBI highlighted in its policy. Given RBI’s pragmatic approach and current market levels, one can expect some near term stability in bond yields, which have been very volatile of late.

The overall macro resilience of the economy remains high. However, we are clearly no longer in a rate easing cycle. Investors should prefer moderate duration portfolios with reasonable carry (accrual) for the bulk of their fixed income allocations.

R.Sivakumar, Head-Fixed Income, Axis Mutual Fund

We expect long bond yields to be range bound. However, the lack of a negative is not a positive, and even at current levels, we do not see value in long bonds given the duration risk involved.

Short rates have also sold off in recent months, with the 1-year certificate of deposit now yielding about 7.5% (compared to 6.5% in November). The entire short end of the curve (1-5 years) now appears to have “overpriced” the risk of tight liquidity and RBI policy stance. We see better value in this segment. Moreover, as the broad macro economy improves, we are also seeing improvement in corporate earnings, which is positive for corporate bonds – especially in the non-AAA space.

Investors with a medium term holding horizon should look to short and medium term funds, while those with a short-term holding period should consider liquid and ultra-short funds.

Pankaj Sharma, CIO- Fixed Income, DSP BlackRock Mutual Fund

In lines with market expectations, RBI has kept rates unchanged and maintained the neutral stance. The status quo on rates and a neutral stance indeed reflect a repeat of the balanced tone as witnessed in the December MPC. That said, we believe that macro variables have moved towards the negative territory over the past 2 months as factors like crude oil, yields in developed markets moving higher, fiscal slippage on the domestic front and prospects of change in MSP mechanism do not augur well for interest rates to head lower.

Hence, we maintain a bias for reversal in the interest rate stance sooner than later. Bond yields have been pricing the same and this policy for now will resist hardening of yields from current levels.

From a market perspective, the outcome of the policy is in line with market expectations and hence the immediate reaction is relatively muted.

Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund

The bond markets in India have been witnessing significant volatility lately. The 10-year G – sec yield has risen from the low of 6.37 percent in the month of Jan 2017 to 7.52 percent as of date.

By any count, this is a major bear grip on the market. The bond market has been wary on two counts — One is the rising CPI inflation and the second is the slipping fiscal deficit.

The market was slightly circumspect in light of fiscal slippage and was expecting a stern stance. In contrast, the RBI came with status quo accompanied by a milder stance. This came as a sign of relief for an excessively bearish market. We believe that the central banker’s policy stance would be increasingly data driven and were the crude prices to behave favourably; we may be in for a long pause.

We believe that markets globally and in India may witness intermittent bouts of volatility in the bond market. Investors thus can utilise tactical asset allocation strategies to benefit from rising opportunities in the debt market.

Relatively high accruing yields and limited NAV volatility make a strong case for investment in accrual/short-term fund segment. For those seeking to lock into current yield, levels could look at allocation to fixed maturity plans (FMPs).

Bottomline, the policy statement has put a lid on to the markets ultra bearish imaginations and going forward global and domestic data points would be watched for by policymakers as also market participants.

Kumaresh Ramakrishnan , CIO-Fixed Income, DHFL Pramerica Mutual Fund.

“We expected a very cautious tone in the policy document and not expecting a rate hike anytime soon. We had expected the policy document to refer to the slippage in fiscal numbers as stated in the budget announced on Feb 1”

He also says that investors looking to invest in fixed income can go for short term debt funds as they will have low volatility. Investors who are willing to take a bit of risk may go for accrual funds.

“Investors who are completely risk-averse or wish to take the minimum risk possible may go for Fixed Maturity Plans (FMPs),

Existing Investors in long term debt funds should revisit their portfolio and allocate a part of their corpus to short term debt funds.

Since a rate hike cannot be ruled in the coming months, investing in long-term debt funds doesn’t make sense anymore. A rising interest rate scenario is bad news for debt funds, especially long-term debt funds, because of the inverse relationship between yield and prices.

Dwijendra Srivastava, CIO-Debt at Sundaram Asset Management Company

10-year benchmark government securities (G-Sec) closed at 7.53%. “Given the current situation we foresee a rate hike in the next financial year. But the quantum of the rate hike and when it would be announced is difficult to predict at this point of time.” He also added that the 10 year yield will continue to remain in the range of 7.4% – 7.6% in the next few months.

Note : Past performance of fund does not guarantee the future returns.

Disclaimer:No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor before making any actual investment decisions, based on information published here.

China is the 2nd largest economy in the whole world and carries substantial economic hit with its trading partners. However, the slight fall in China’s equity market on 23rd November 2017 has set a fret in financial markets of China.

The current year, China’s bond yields have risen by 93 bps and are trading at 3-year highs. The sharp rise in China bond yields specifies the government’s determination to control corporate debt, which involves them in a talk that Chinese economy could fall in the coming future.

China CSI 300 Index

The top stock on Hang Seng was WH Group Ltd which stood up 1.69% and the stock which suffered loss was AAC Technologies Holdings Inc which sustained a downfall of 4.24%.

The 3 biggest H-shares percentage decliners were China Pacific Insurance Group Corporation Ltd which had a downfall of 4.73%, New China Life Insurance Corporation Ltd which has 4.7% and China Merchants Bank Corporation Ltd down by 4.1% while the biggest stocks which perform well were China Minsheng Banking Corporation Ltd which stood up 2.41%, Great Wall Motor Corporation Ltd which gained 0.98% and China railway Construction Corporation Ltd who stood up 0.77% in the Chinese financial market.

China 10 Years Bond Yields

The CSI 300 index is moving smoothly by 3.3% and closed down at 3% which is its biggest loss since June 2016 i.e., within 17 months. The ChiNext Index stood down by 3.2% which is its highest downfall in 4 months. The other two stocks, i.e., Shanghai Composite Index and Shenzhen Composite Index fell more than 2% that day.

According to the report, China’s five years corporate bond yields had risen by 33 bps in November 2017, which has hit a three year high of 5.3%. In China, there is more than 1 trillion dollar of local bonds which are going to get matured in the coming year 2018-2019, therefore, it is going to be expensive for these firms to roll over financing.

Every stock market investor wants to buy equities when markets are at their low and sell them when markets are at their peak. But it’s easier said than done as it is always hard to resist temptation when markets are near their peak and it’s always tough to find the courage to jump into equity markets when the markets are falling. But if the investors are willing to take the mutual funds route the above can be easily done with the help of dynamic mutual funds.

Dynamic funds switch between different asset classes, depending on their attractiveness.

Dynamic funds are specifically designed to switch seamlessly between equity and debt, depending on the market conditions. The fund manager of this scheme shifts between the asset classes based on their attractiveness as indicated by certain valuation metrics. Hence, in a rising market scenario, these funds will invest a larger portion of the corpus in equities and hold a lesser amount in debt and cash.

In the case of a falling market, the scheme will allocate more money to debt and, perhaps, hold more cash, while slashing the exposure to equities. Even hybrid funds do that, but they can’t switch rapidly between asset classes and they’re typically true to one asset class, such as equity in case of balanced funds and they invest less in other asset classes. Dynamic funds aim to switch aggressively between equity and debt and are more opportunistic. In dynamic funds you can buy on dips and sell when the markets are at high levels. These asset allocation funds act as a shield against market downswings and they typically lose less money when the markets are down.

These funds aims to normally invest in equity but can react quickly to a negative market by moving 100 per cent of its assets into money market instruments, fixed income securities and derivatives with an aim to limit the downside risk, in the event that the fund manager is bearish on the market.

Dynamic funds often have another interesting characteristic. The balance between debt and equity is decided not by the fund manager, but by a formula. To be sure, this is not passive investing (as in an index fund), because the recipe for asset allocation is itself a result of research by the fund house, but there is an element of automation involved. Most funds in the space decide their asset allocation based on a clear formula.

For instance, some funds make equity allotments based on the nifty’s PE while some funds follow the PBV ratio. The goal is always to use indicators like P/E ratio and others to define a time when the markets are ready to fall and to reduce equity allocation at that time and to increase it when the market has fallen enough. Either way, this type of fund brings an interesting element into equity fund investing.

Normal equity funds are always supposed to be invested in equities. Conceptually, their job is to do better than the equity market, their job is not to make gains but to do better than their benchmark, even if that means falling less than the markets when the markets are falling.

Dynamic funds, on the other hand, implicitly make the promise of being absolute return funds. They define their job as making gains with their equity investments just like non-dynamic equity funds, but additionally as also getting out of equities when the markets are not going to do well.

Typically, dynamic funds underperform as compared to pure equity funds in continuously rising equity markets because these funds sell equities and get into cash as equity markets go up. But when the markets going down or when there are many fluctuations in the market these funds will often perform better than the normal funds.

A well-managed dynamic fund can absolve you of the headache of timing the markets and investors can earn good returns if they remain with these funds for long term. You could consider such a fund for stability in your investments in a volatile climate. However, remember that aggressive rebalancing may not always work in the fund’s favor. It is also not advisable to go by the short-term performance of these funds alone. They can provide good results if they are held for a reasonable time, at least three to five years. These funds are able to make the most of the market ups and downs given adequate room to work.

No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here.

In all the noise about rising bad loans, a deposit deluge in the aftermath of demonetization and the collapse of credit growth, it’s time to take stock of where public funds are lying right now in the economy.

In a report from the Reserve Bank of India, the credit-deposit ratio as of the month of May was 72%, which means that out of Rs.100 deposited in the bank,Rs.72 used for lending and the rest Rs.28 was used to buy government bonds. In the same time of the previous year, banks have used Rs.76 out of Rs.100 deposit for lending and had left the rest Rs.24 in bonds. This is as per the stock of deposits on the 30th of the month.

Source : Centre for Monitoring Indian Economy

Taking a look at the additional credit-deposit ratio, which shows what portion of the new flow of deposits, is getting placed in the credit. And this reflects the slump in credit growth in 2016-17.

By the time of March-end the additional credit-deposit ratio was 42%, this shows that more than half of the deposits that came in were placed in government bonds. These are low-yielding and very safe assets. This could be easily understood by the fact that the deposit stream following the demonetization of Rs.500 and Rs.1000 currency bills left a little choice to the banks to buy nothing but the government bonds as the loan demand is very less. Moreover, during the demonetization period, this was even lesser in the month of November, it was 1% only which aroused to nearly 13% in the month of December.

Now, if we talk about the month of May where the credit-deposit ratio was 72%, the large amount of share is still placed with industry through the loans accompanied by credit to services as well as individuals.

Share/Portion of Rs.100 Deposited

Out of every Rs.72 lent, nearly Rs.17 only went to personal loans and services each, and approximately Rs.28 or 29 went to build or run the factories. A share of Rs.10 went to agriculture. The share of personal loans has aroused in one year to approximately 25% of total non-food credit from 21%. On the other side, the industry has dropped to 38% from 41% while farming maintained its portion of nearly 14%. Basically, only Rs.25 of every Rs.100 deposited in a bank comes back to the people in the form of loans like home loans, carloans and other credits.

It is known that the banks are burdened with a big heap of bad loans. Approximately Rs.14 of every Rs.72 lent is now classified as stressed portion, which means it neither originate any income for the banks or due to the late payments by the borrowers to lenders.